As talks of a Chinese hardlanding continue to make the rounds, Maplecroft is out with its map of emerging global risks. This week draws attention to the economic risk in China, which needs to drive up domestic consumption to stem the economic slowdown.
Here’s a map and an article on the increasing macroeconomic risks in China via Maplecroft:
New figures released on 17 January 2012 by China’s National Bureau of Statistics indicate that China’s economy grew by 8.9% year-on-year in the fourth quarter of 2011, the slowest pace since 2009. While growth was higher than initially expected – analysts had forecast an 8.7% year-on-year change – it is still lower than the 9.1% growth registered in the third quarter of the year. Ma Jiantang, spokesman for the statistics office, commented on the newly-released figures by saying that China has entered a ‘year of complexity and challenges’.
A closer look at the data released by the National Bureau of Statistics suggests that China’s economy has entered a phase of slowing growth, driven by falling investment and reduced exports. Growth in investment fell to 18.5% year-on-year in December 2011, compared to 25% in October 2011. Export growth is also seen as levelling out due to economic uncertainty in the Eurozone and US. Exports rose by 20.3% in 2011 year-on-year, down from 31.3% in 2010. As a consequence, industrial production grew at only 12.3%, its lowest level of growth since 2009. The Chinese economy is expected to grow at lower levels and stabilise in the medium-term through a ‘soft landing’. The IMF projects that the country’s economy will grow by 9.5% year-on-year in 2011, and 9.0% in 2012.
Shifting towards domestic consumption
The slowdown highlights the fact that China remains exposed to global economic shocks. Structural reforms, including the reorientation towards domestic consumption, would help alleviate this risk and ensure greater sustainability of long-term growth. In this regard, the government’s economic plans for 2012 focus largely on boosting domestic demand to balance falling exports. This marks a departure from last year’s focus on containing inflation and rising real estate prices.
The emergence of China, as well as other BRICs economies (Brazil, Russia, India and China), has largely been built on export-led growth on the back of low labour costs. In China, this has been aided by an artificially low exchange rate. Yet with exports from the BRICs facing competition from other emerging economies, and with export markets in advanced economies floundering, the need to spur domestic consumption has been recognised.
Reducing the proportion of income saved by households will be essential to orientating China’s economy towards domestic consumption. Traditionally, high savings rates have supported investment; however, this has also served to limit consumption expenditure. Rising average incomes will help to a certain extent, as savings as a proportion of disposable income tend to fall as incomes rise, but a change in consumer preferences will also be necessary. Additionally, rising wage levels will raise production costs and inhibit the competitiveness of exports on which China’s growth has largely been based, further reinforcing the need to boost domestic demand.
Real estate bubble
Along with external factors, China is also facing domestic difficulties which threaten to further hinder economic growth. In 2010, the Chinese government adopted new regulations for the real estate market – including stricter requirements for down-payments, higher mortgage rates and a ban on real estate acquisitions by non-residents or property-owners in some cities – in order to reduce property prices. These aimed at containing inflation as well as avoiding a real estate crash which could heavily undermine the economy.
While Beijing maintains that such measures should remain in place, there are concerns that falling property prices and decreased transactions could slow down the economy further, which relies heavily on the real estate and construction sectors for growth. Real estate has been one of the key drivers of Chinese economic expansion, accounting for 13% of GDP in 2011 and 25% of total investment in the country. Property construction also accounts for 40% of the country’s steel production, as well as copper, cement, coal and other construction materials. While Beijing may reverse its real estate policies if prices continue to fall steadily, many fear that the government may wait too long to do this.
Leadership change in Beijing
Worsening economic conditions will add pressure to the new leadership in Beijing. Not much is known about Xi Jinping, who is expected to replace Hu Jintao in October or November 2012, although his stance on the economy and domestic politics is unlikely to differ significantly from that of the current leadership. It remains to be seen how Xi will tackle economic issues in times of a downturn – whether he will maintain Hu’s ultra-cautious approach or risk taking strong decisions. With the Chinese Communist Party (CCP) laying the foundations of its legitimacy on economic growth rather than ideology, economic hardship may drive popular discontent and result in potential political instability.
Confronted with the economic slowdown, Beijing is expected to start loosening monetary and fiscal policy over the course of 2012. This trend has already emerged after the government cut reserve requirement ratios for commercial banks in November 2011, in a bid to protect the domestic economy against economic instability in the Eurozone and the US. In the short term, however, economic growth is projected to continue to slow on the back of uncertainty in Europe – China’s main export market with US$367.73bn of goods exported in 2010. The Chinese economy is nevertheless expected to achieve a ‘soft landing’, with growth stabilising in the medium-term through high government spending and projected rising domestic consumption.